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NASDAQ Adds Third Equity Options - Analyst Blog

On Friday,
NASDAQ OMX Group Inc.
(
NDAQ
) announced its plan to launch its third retail equity stock
options trading platform - BX Options - in the US in June this
year. The launch is subject to the receipt of approval from the
Securities and Exchange Commission (SEC).

This new trading venue will aim for retail investors in an
attempt to enhance liquidity, reduce risk and improve pricing amid
low-latency protocols.

Additionally, customers on this options market will be able to
receive benefit not only from BX Options, but also from its NASDAQ
OMX PHLX (PHLX) and the NASDAQ Options Market (NOM), all of which
operate efficiently on the company's core INET technology. Thus, it
will offer a cheap, transparent and user-friendly options platform
for retail order flow.

However, the US options market is marred by intense competition
given that nine exchanges, including
NYSE Euronext Inc.
(
NYX
), BATS Global Markets and Boston Options Exchange, are already
combating against each other for a fair share.

Moreover, two more exchanges along with NASDAQ are expected to
take a dive into this trading venue. Although the ongoing market
volatility places a favourable environment for options markets that
hedges risk, the waning volumes in the cash equities over the past
few months showcase a contraction in the US options industry.

According to Options Industry Council, the average daily trading
volume on all the US options exchanges fell 4.71% year over year to
15.98 million in April this year. Even NASDAQ faced substantial
volume declines during the first quarter of 2012, thereby
validating the suppression. Hence, it is too early to ascertain the
value-addition and earnings accretion for NASDAQ from the launch of
BX Options.

Upswing in Delivering Technology Services

Nevertheless, last week was a high-activity period for NASDAQ,
whereby the company publicized more business developments to boost
long-term growth through technological services.

Concurrently, the company won a technology contract from the New
Zealand stock exchange, whereby NASDAQ will offer its X-stream
technology for trading of equities and derivatives securities. The
company is likely to start offering its technology services to the
New Zealand stock exchange by end of 2012. X-stream is a
multi-asset trading system, which is deployed in 22 global
markets.

The deal was backed by a separate agreement with Egyptian
Exchange (EGX), whereby NASDAQ extended its alliance to offer
X-stream technology to the latter for another five years. The
company has also upgraded its technological alliances with other
exchanges such as SIX Group, the Swiss exchange and the Nigeria
stock exchange.

In addition, NASDAQ also announced the acquisition of BWise,
which is a global leader in enterprise governance, risk management
and compliance (GRC) software. BWise's GRC solutions will be
available through NASDAQ Corporate Solutions' software technology
business.

Additionally, the acquisition also complements and boosts
NASDAQ's SMART technology that is also a surveillance and
compliance monitoring platform for brokers, exchanges and
regulators. However, the terms and financials of the deal remain
undisclosed.

Overall, NASDAQ's outstanding technical performance along with
the recent alliances and acquisitions have enabled the company to
enter new markets on a low cost and highly flexible platform,
offering value addition to its clients and creating additional
sales opportunities.

While the equity markets cast a lackluster outlook, we believe
enhancing its technological services will help NASDAQ sustain a
stable growth until markets rebound. Moreover, the heightened
regulations across globe have also pepped up the demand for the
company's information and technology services.

However, the company still needs to tackle grave issues
concerning the ongoing competitive M&A activity and headwinds
related to expenses, volume and pricing continue to limit the
desired upside. These limitations reflect the pressing need to
respond to the changing industry dynamics and dig in opportunities
for gaining scale.

Based on the pros and cons, currently we have maintained a
Neutral stance on NASDAQ, carrying a Zacks Rank #3, implying a
short-term Hold recommendation.

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